While a deed in lieu of has less of a damaging impact on your credit score than foreclosure, it is still horrible for any credit report. However, a deed in lieu is one of the fastest and cheapest ways to get rid of a home you cannot afford or sell. Before you make any decision, research all options, especially if you want to save your credit rating.
Identification
A deed in lieu involves you voluntarily relinquishing possession of your home to your lender. In general, a deed in lieu is as bad as foreclosure or a short sale to lenders. As far as your credit score, however, it may do a little less damage than any other option that ends with you paying the creditor less than you borrowed. Your score may drop anywhere from 85 to 160 points -- far less if you have terrible credit and several other bad items on your credit report before the bank accepts a deed transfer.
Alternatives
Anything is better for your credit score than foreclosure. However, a short sale might be the best option for your credit score, because the proceeds from the sale of the property might satisfy the balance on the mortgage. Ideally, you want to ask the lender for a loan modification, such as a lower interest rate, that helps you meet monthly mortgage payments so you can return the account to positive status.
Credit Reporting Time Limit
A deed in lieu of stays on your credit report for seven years, as does foreclosure or a short sale. Because a bank processes a deed in lieu of faster than foreclosure or a short sale, a deed in lieu generally lets you rebuild your credit faster than any foreclosure option. Short sales can take months before you find the right buyer and foreclosures can take a year or longer due to regulations and time in court. Time is important in a credit rating, so you want to stop missed payments and add positive data as soon as possible.
Tip
It never hurts to ask the lender how it plans to report the account, and try to get the bank to report the account as "paid as agreed" in your negotiation for a deed in lieu of. However, do not plan on the bank offering any positive reporting on the account. Also, banks do not always go for a deed in lieu, because banks tend to avoid owning property to avoid taxes and maintenance costs.
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